Daily analysis 16.11.2015:
Terrorist attacks in France should not have a visible impact on currencies. An interesting interview with Eric Rosengren for the Financial Times. The zloty is slightly weaker despite the advantage of positive reports from the Polish economy. In his interview with Interia, Andrzej Rzońca was for an increase rather than a decrease in interest rates.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- The base case inflation from Poland for October (estimations: +0.3% y/y).
Monetary policy again
Terrorist assassinations in France caused a global increase in aversion towards risk. However, there is a small chance that the tragic events from Paris will have an impact on the most crucial matter shaping currency rates, which is the monetary policy of the main global central banks. Thus, for the time being the wide consensus regarding the extension of the QE in the eurozone and a slight decrease in the deposit rate by the EBC should remain unchanged.
On the other hand, the scenario of monetary tightening in the USA should also not be disturbed by non-economic events. According to last week's survey conducted by The Wall Street Journal, 92% of economists expect the American interest rates to be raised in December. Currently, this scenario seems safe and is probably included in the price of the USD.
There is a significantly greater uncertainty regarding the pace of monetary tightening. After the recent good data from the American labour market, we suggested that the discussion regarding the path of hikes may begin soon. And it does not have to be as mild as some expect.
Last week's statements from Charles Evans, one of the greatest supporters of a mild monetary policy, suggest that interest rates should be within the limits of 0.75-1% by the end of next year. Thus, one can assume that this is a downward limit of expectations. A similar range is currently evaluated by the market.
On the other hand, September's macroeconomic projections from the Fed suggest a total of 5 hikes by 25 base case points by the end of 2016. This gives a range of 1.25-1.50. There is a big chance that this consensus of the Fed will not be significantly modified in December. However, this will be an argument for the market to get closer to the consensus of the Federal Reserve, thus evaluate a faster increase than currently. This could be a positive signal for the USD.
New interesting statements from Rosengren
The above theory is to a certain degree confirmed by the statements from Eric Rosengren. In his interview with the Financial Times, the chairman of the Boston Fed department, who not long ago was considered as more dovish than the consensus, takes note of possible arguments for “a slightly faster monetary tightening”, if the American commercial real estate market does not stabilise.
Thus, Rosengren's suggestions go slightly beyond the area of most economists' interest. They are concentrating mainly on future inflation and trends in employment. The interview for the Financial Times also shows that the Fed may try to prevent creating disproportions in the economy by looking at the signals from the real estate market among others.
Rosengren also spoke a bit about the matter of the dollar and the divergence of the monetary policy in the USA and other countries. Statements from the representative of the Boston Fed regarding these matters were more dovish. “If divergence is so great that it has a significant impact on the dollar, it will probably mean following a flatter path than in another case”.
Thus, it shows that the Fed is sensitive to the matters of the dollar. However, “a significant impact” probably means the appreciation of the American currency at least in the area of March peaks on the USD. It is possible that depreciation of the EUR/USD below the standard would be a strong enough argument for the FOMC to change the path of monetary tightening. However, it is still quite distant, thus the space of appreciation on the USD remains clear.
Few words about the foreign market
The terrorist attacks in Paris should not have a visible impact on the main currency pair. In December, the EBC as well as the Fed will probably undertake the expected decisions, which most of all creates the behaviour on the EUR/USD. Wednesday's minutes from October's FOMC meeting will be the most significant within the following days. First of all, it should convince the market for December's monetary tightening. Second of all, it may give a new appreciation impulse for the dollar by further exposing the hawkish part of the Federal Reserve.
Rzońca supports the hikes
The zloty is slightly weaker than it could have seemed from Friday's GDP readings, or the slightly higher final reading of inflation for October. However, it is possible that the market is still waiting for the first decisions of the new cabinet and any suggestions regarding the new Monetary Policy Council.
On the other hand, in his interview with Interia Andrzej Rzońca definitely denies the necessity of monetary easing in Poland. The MPC representative who is a part of the hawkish fraction, claims that “the new MPC should think of normalisation in interest rates, which means their gradual raising”.
Today's reading of the base case inflation is most likely to become news of the day. However, it should not have a visible impact on the zloty's quotations and the majority of transactions on the EUR/PLN will probably be held slightly below 4.25.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/USD rate:
This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.
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